CPI Core Shows Inflation
The drop in energy prices, had the knee jerk reaction that we were in a deflationary spiral, again markets get many things wrong on first blush. The drop in energy prices is inflationary in the overall economy, and today`s CPI report showed what a sophisticated analysis would forecast regarding inflation and the role that low energy prices play in the overall inflation equation. We are going to have a transfer from the food and energy components which rely heavily on energy costs into the core inflation reading as consumers have more money in their pockets for true discretionary spending, and all these components` prices are going to rise in the CPI Inflation Index.
Wages, Wages, Wages
What should really be worrying for the Fed is that wages have been spiking under the radar for 2014, up ahead of the overall inflation metric, and leading the way on inflation, and 2015 has seen an even greater surge in wage inflation, again you might not want what you wish for when it actually comes to fruition, with wages surging the Fed now has no choice but to raise rates, and raise them fast!
Walmart: Canary in the Coal Mine
It should have been a warning sign to the Fed when Walmart (WMT) of all people voluntarily raises wages across the board for its employees, they aren`t doing this out of the kindness of their heart. If one takes a look at the JOLTS numbers, and the competition for employees in a tightening labor market, wages are going to have to rise to compete for the available labor pool. 2015 is going to be the year of the wages, and inflation is going to blow through the Fed`s 2% target towards the end of the year once the bad energy comp components come out of the data set.
Lower Energy Costs are Inflationary to the Overall Economy
The drop in energy made everyone complacent on inflation, and everyone just assumed that inflation was never going to rear its ugly head again, but that was a mistake because we have had some elevated inflation numbers in the past 20 years with much less money printing, much higher Fed Funds Rates, and much lower overall energy costs coursing through the entire economic system. So when you look at the employment numbers for 2014 and 2015 it was only a matter of time before core inflation started picking up, stealthy at first due to the drop in energy prices, but slowly gaining steam under the radar, and the longer the Fed waits on raising rates the more they are going to have to raise rates the back half of 2016.
